South Korea and Japan Will Grow to Dominate Cryptocurrency

Regulators are reflexive in a robust market and set the tone

Feb 16, 2018 · 5 min read

The cryptocurrency economy saw an astronomical rise in value in 2017, with much of the demand originating from countries in Asia. China was the biggest player by far, capturing over 80 percent of the global Bitcoin trade volume, according to some reports. But that was before the Chinese government began its crackdown on digital currencies. In the autumn of 2017 the country banned ICOs and closed some of the largest cryptocurrency exchanges. The signal was clear. The trade volume held in Chinese Yuan crashed, sending the markets into disarray and opening doors for other nations in the region. Countries like Hong Kong, Singapore and Indonesia have cryptocurrency economies worth watching, but it is Japan and South Korea that have emerged in full force to fill the gap.

The Japanese Yen (JPY) cryptocurrency market is now the second largest in the world, after the US dollar. It is also emerging as a global leader in the development of cryptocurrencies. This dominance has much to do with the government’s newly adopted approach to digital currencies, which appears to be one of friendly welcome. Japan effectively legalized cryptocurrency trade last year. In April they recognized Bitcoin as a form of payment, then gave official approval to eleven cryptocurrency exchanges. Japan even has a themed girl group, ‘The Virtual Currency Girls’, whose eight members represent eight different cryptocurrencies. Wearing maid outfits and masks featuring their character currency, their mission is to educate their fanbase and the Japanese public on the benefits of the emerging crypto economy.

If anything, South Korea has an even stronger case of cryptocurrency fever. The South Korean Won (KRW) holds third place in terms of global cryptocurrency market size, which is impressive given the country’s GDP, which is under a third of Japan’s. However, like many nations around the world, South Korea’s government is still in the process of establishing its stance towards this rapidly growing new economy. Mixed signals on proposed legislation around trading in the country have affected the market and raised worries about the future.

The Land of the Rising Sun shines brightly on cryptocurrency

Tokyo has an established reputation as a global home for cutting-edge tech and innovation. It was the first major economy to bestow legitimacy on virtual currencies, by recognising Bitcoin and other virtual currencies as legal tender in April of 2017. In September, the Financial Services Agency officially recognised eleven companies as cryptocurrency exchanges. Now there are sixteen in operation, while another sixteen are awaiting clearance.

In macroeconomic terms, the embrace of cryptocurrency makes sense. Japan has taken time to recover from its so-called ‘Lost Decade’ of economic stagnation. Its relatively low growth and high savings rate make cryptocurrency an attractive option. While a trailblazer in tech development, Japan and its authorities are notoriously conservative when it comes to financial innovation. The government’s forward-looking attitude to virtual currencies may in fact be a reaction to that. The use of blockchain has given Japan an opportunity to shake things up a little and push local banks into more aggressive development. At the same time, the state’s proactive approach to regulation is also a way to keep crypto trading under centralized control.

Since the legalization went through last Spring, Japan has enjoyed a cryptocurrency boom, with huge growth in retail investor interest and over-the-counter (OTC) services. They’re not just making strides when it comes to trading. Japan is also becoming an important testing ground for blockchain innovation. For example, Hitachi, a major Japanese multinational company, has partnered up with Tech Bureau, a fintech and cryptocurrency solutions company, on a project that is using the NEM-based Mijin Blockchain platform. The project has support from the Japanese government and the Ministry of Economy and Trade.

In January, the Japanese cryptocurrency exchange Coincheck was hacked in what has been described as the biggest digital currency theft in history, affecting 260,000 customers. However this does not appear to have deterred the Japanese government or its population. Cryptocurrency is especially popular among a generation of young investors, who welcome the positive approach of the state in establishing Japan as a cryptocurrency capital of the world.

The Asian tiger bites — but the future is uncertain

For a relatively small country, South Korea is punching above its weight when it comes to the cryptocurrency economy. It’s a visionary society for tech with a strong entrepreneurial culture. The national ban on gambling may also partly explain the grip of cryptocurrency trading fever. In December 2017, there were believed to be over one million registered daily traders in cryptocurrency in South Korea, which translates to one out of every 50 citizens.

Even for one of the cut-throat Asian tiger economies, this rate of adoption seems quite spectacular. The boom was partly a result of timing. In 2017, local investment options in South Korea had become less appealing. These had focused heavily on the domestic stock market and real estate, and both were being squeezed, leading many investors to look elsewhere. Risk takers were especially attracted to Bitcoin and Ethereum, as well as other cryptocurrencies. South Korea is the largest exchange market and home to some of the top exchange houses for Ethereum.

However, the South Korean government is still establishing its legal stance on cryptocurrencies. In September, the Financial Services Commission ordered a ban on ICOs. Following the ban ordered by China, which also made clear that month that they did not recognise this form of fundraising, the move worried investors. In January, the news hit that the government was preparing a bill to ban cryptocurrency trading.

Yet comparisons between China’s crackdown on cryptocurrency and South Korea’s approach tend to be misleading. This month (February), the government appeared to downplay the threat of a ban. The minister of the Office for Government Policy Coordination announced that the country would concentrate on transparency, rather than outlawing trading altogether. Government statements seem to imply that South Korea intends to monitor trading, not “directly supervise” or ban exchanges. The government has also signalled that it may start taxing cryptocurrency transactions, which would put it in a small group of countries that levy tax on cryptocurrency-cash exchanges. An official decision on the proposed plan is expected within the first quarter of 2018.

Meanwhile some of the biggest corporations in South Korea have invested in crypto businesses, including Samsung, the country’s largest conglomerate, and Nexon, one of its biggest video game developers. While the government maintains its light-touch approach, it seems that South Korea will remain a heavy-hitter in the cryptocurrency world.

It’s no surprise that Japan and South Korea are big players in the crypto world. Both are high-tech societies adapted to embracing new technologies. Both are also low-growth economies with relatively high savings rates. It was natural for these countries to play a role in filling the gap that opened up after the Chinese government’s crackdown. However, the crypto economy is notoriously volatile. Understanding the basis for the emerging dominance of these countries over the cryptocurrency market helps to predict what the future may hold.

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Digital Asset Advisors. Traders. Stewards of Value. Nerds. It's A Brave New World.